Payable-On-Death Bank Account: Pros And Cons (2024)

A payable-on-death (POD) bank account simplifies and speeds up the process of transferring the assets in your bank or credit union accounts to one or more beneficiaries. Here’s a closer look at what a payable-on-death bank account is, how to set one up and the benefits and drawbacks of having one.

What Is a Payable-on-Death Bank Account?

A payable-on-death bank account lets you name one or more beneficiaries who will receive any money in the account after you die. Having a POD account simplifies the process of transferring your bank assets to your beneficiaries after death, as funds go directly to them and don’t get tied up in a lengthy probate process.

While not all bank accounts have to go through probate—especially if balances are low—having a POD account ensures your beneficiaries can access the funds in your bank accounts quickly and easily. This can be especially important if the money will be used to pay for funeral costs, as the burden of this expense often falls on family members.

POD accounts are popular because they’re free to set up and don’t require the use of an attorney. However, they’re not meant to serve as a substitute for a living trust or will. While POD accounts can cover simple financial situations, like transferring your bank account assets to a beneficiary, they’re less flexible and provide fewer protections for your beneficiaries than revocable living trusts.

How Does a Payable-on-Death Bank Account Work?

A POD account requires that you name one or more beneficiaries. POD beneficiaries can be individuals, groups of individuals, nonprofits, businesses, organizations or trusts. However, the owner or co-owner of your account can’t be named as a beneficiary.

There’s no limit to the number of POD beneficiaries you can name on an account, and in many states, each beneficiary must receive an equal share. For example, if you have $10,000 in a POD account with two beneficiaries, each will receive $5,000. If one of the beneficiaries dies before you do, the remaining beneficiary will receive $10,000.

To receive the funds, the beneficiary must show the bank a death certificate and personal identification along with a beneficiary letter of instruction. No third party, like a trustee or lawyer, is required.

What types of accounts can be POD accounts?

You can set up POD beneficiaries on the following types of financial accounts:

• Checking accounts
• Savings accounts
• Certificate of deposit (CD) accounts
• Individual retirement accounts (IRAs)
• Investment accounts

These accounts can be co-owned, but only the owner of the account can designate POD beneficiaries.

Pros and Cons of Payable-on-Death Bank Accounts

While setting up a POD account may be the right choice in some circ*mstances, it isn’t always the best option. Consider the following pros and cons.

Pros of POD Bank Accounts

• No monetary restrictions. Regardless of how much is in your bank account at the time of death, there is generally no restriction on how much money your beneficiaries can take out. However, beneficiaries are still responsible for paying inheritance taxes.
• Free to set up. To set up a POD account, simply contact your bank and provide some basic information about your beneficiaries. You typically don’t need an estate planning attorney.
• Only basic information required. To designate an individual as a beneficiary, you only need to provide their name, address, date of birth, country of residence and Social Security number (SSN) or Tax Identification Number (TIN). To designate an entity, you’ll need to provide the legal name of the entity, its address and an SSN or TIN.
• Bank assets are not subject to probate. POD accounts are contractual, so your assets are not subject to a will or the probate process. This ensures your assets can be transferred to your beneficiaries quickly and efficiently.
• Pays out faster than a life insurance policy. Beneficiaries only need to present a death certificate and beneficiary letter of instruction to receive funds right away. Life insurance policies can take up to 60 days to pay out.
• Can change beneficiaries. You can change or remove the beneficiaries on your POD accounts at any time.

Cons of POD Bank Accounts

• Limited to specific account types. POD beneficiaries can only be assigned to specific types of deposit and investment accounts. They are not a substitute for a living will, which specifies how other assets, like real estate, are to be distributed.
• POD accounts typically override wills and trusts. Be sure your POD account doesn’t contradict your will. If you leave money to Jane in a POD account and forget that you also left this account to John in your will, Jane will likely receive the money.
• POD accounts may forfeit certain tax strategies. If you’re a high-net-worth individual utilizing credit shelter trusts, marital trusts or generation-skipping trusts, transferring assets with a POD may result in a loss of tax advantages for your heirs.
• Creditors may still have claims on POD assets. Having a POD doesn’t shelter your bank assets from creditors, especially if your probate assets don’t cover your liabilities after death.
• Funds could run out before death. If your bank funds are depleted before your death due to medical or other expenses, this could result in an unintended loss for your heirs.
• Beneficiaries could die before you. If this happens and you die without a living trust in place, your POD assets will go through the probate process.

Payable-on-Death Bank Account vs. In Trust For

An in-trust for (ITF) account is another financial account with one or more beneficiaries, but assets in the account are managed by a named trustee on their behalf. This can be beneficial if you have children and don’t want them to access your assets until they reach a certain age or meet certain conditions.

With a POD account, there’s no trustee managing your assets. When you pass, the assets go directly to your beneficiaries. It’s a simple way to distribute your funds without having to involve probate or a third party. It’s also less expensive than setting up an ITF, which may involve hiring a lawyer.

The Bottom Line

POD accounts can play an important role in your estate planning by allowing your bank assets to transfer directly to your heirs without the need for probate. But they’re not a substitute for a living trust and may have certain tax drawbacks, especially for wealthy individuals.

As always, it’s a good idea to consult with a qualified financial consultant or lawyer to determine the best estate planning and tax strategies for your needs.